Banks Should Help, Not Hinder the Economy

By Will Kerry and Andrea Maechler 

Banks are struggling to overhaul the way they do business given new realities and new regulations adopted in the aftermath of the global financial crisis. While banks are generally stronger—they have more capital—they are less profitable, as measured by the return on equity. There are a number of reasons behind this, including: anemic net income at banks, particularly in the euro area; higher levels of equity; and banks taking fewer risks.

If they cannot change their business models, there is a risk that banks will not be able to provide enough credit to help the economy grow and recover.

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Are Banks Too Large? Maybe, Maybe Not

By Luc Laeven, Lev Ratnovski, and Hui Tong

Large banks were at the center of the recent financial crisis. The public dismay at costly but necessary bailouts of “too-big-to-fail” banks has triggered an active debate on the optimal size and range of activities of banks.

But this debate remains inconclusive, in part because the economics of an “optimal” bank size is far from clear. Our recent study tries to fill this gap by summarizing what we know about large banks using data for a large cross-section of banking firms in 52 countries.

We find that while large banks are riskier, and create most of the systemic risk in the financial system, it is difficult to determine an “optimal” bank size. In this setting, we find that the best policy option may not be outright restrictions on bank size, but capital—requiring  large banks to hold more capital—and better bank resolution and governance.

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The Time is Nigh: How Reforms Can Bring Back Productivity Growth in Emerging Markets

By  Era Dabla-Norris and Kalpana Kochar

(Version in Español)

The era of remarkable growth in many emerging market economies fueled by cheap money and high commodity prices may very well be coming to an end.

The slowdown reflects not just inadequate global demand, but also structural factors that are rendering previous growth engines less effective, and the fact that economic “good times” reduced the incentives to implement further reforms to enhance productivity. With the end of the period of favorable global financing and trade conditions, the time is nigh for governments to make strong efforts to increase productivity—the essential foundation of sustainable growth and rising living standards. (more…)

How To Make A Graceful Exit: The Potential Perils of Ending Extraordinary Central Bank Policies

Erik Oppers MCMBy Erik Oppers

This spring monetary policy is the talk of the town.  It is everywhere you look, it’s unique, and you’ve never seen anything quite like it before: short-term interest rates at zero for several years running, and central bank balance sheets swelling with government bonds and other assets in the euro area Japan, the United Kingdom, and the United States.

But the meteoric rise of this once dusty topic can’t last.  The end of these unconventional monetary policies will come and may pose threats to financial stability because of the length and breadth of their unprecedented reign.  Policymakers should be alert to the risks and take gradual and predictable measures to address them.

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Make the Most of What You’ve Got: Small States in the Spotlight

Min ZhuBy Min Zhu

The economies of small states have unique features. They have relatively higher costs, higher public spending needs, and more volatile economies. And their growth has not matched the improved economic performance of the rest of the world since the late 1990s, despite their many efforts over the years. We wanted a better grasp of why this is so we can better tailor our advice and support. Here is what we found.

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By | April 1st, 2013|Asia, Emerging Markets, growth, IMF, International Monetary Fund|0 Comments

We May Have Avoided the Cliffs, But We Still Face High Mountains

Compared to where we were at the same time last year, acute risks have decreased. The United States has avoided the fiscal cliff, and the euro explosion in Europe did not occur. And uncertainty is lower. But we should be under no illusion. There remain considerable challenges ahead. And the recovery continues to be slow, indeed much too slow. Overall, these developments lead us to forecast 3.5 percent world growth for 2013.

The Ties That Bond Us: What Demand For Government Debt Can Tell Us About the Risks Ahead

It has become apparent in recent years is that advanced economy government bond markets can also experience investor outflows, and associated runs. Our new research shows that advanced economies’ exposure to refinancing risk and changes in government borrowing costs depend mainly on who is holding the bonds— the demand side for government debt. Tracking who owns what, when and for how long can shed some light on potential risks in advanced economies’ government debt markets.

Time Not On Our Side: Tough Decisions Needed to Strengthen Financial Stability

As recognized in our Global Financial Stability Report, actions taken by the European Central Bank have helped remove investors’ worst fears. Now policymakers at both the national and euro area level will need to build on these. The stakes are high. For instance, if pressures continue, total assets of major banks in Europe could shrink by as much as $2.8 trillion, possibly leading to a contraction in credit supply in the "periphery" by 9 percent by the end of 2013.

U.S. Fiscal Policy: Avoiding Self-Inflicted Wounds

In late 2012 or early 2013 the U.S. federal government will again reach a statutory borrowing limit and will not be able to issue additional debt. Why is this a problem? First, because the federal government is spending considerably more than it collects in taxes; and second, because spending and tax collections are not synchronized. As a result, if the ceiling is not raised in time, the government would need to cut spending drastically, curtailing important government functions, with detrimental effects on output and employment. And just the mere possibility that the government might have to delay a payment on a bond could unsettle financial markets.

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